A big story in both national and business news today is ValuJet. We offer a Special Section today, focusing on the company's current valuation and also providing some historical background on the effects of crashes on stock price movements. You'll find our Special Sections, FoolWires, and earnings reports, on the Evening News screen. In tonight's Fool on the Hill, MF Templar looks at ValuJet.
Act Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ANET)") else Response.Write("(NASDAQ: ANET)") end if %>, which traded around $7 six months ago, has seen its shares rocket as investors got excited about its frame-relay technology. Today shares rallied $5 3/4 to $43 1/2 as the company announced a patent license agreement with Skydata. Act's frame relay product, SkyFrame, makes communications and connectivity more efficient and cost-effective through satellite technology, particularly for companies operating overseas and in remote locations, such as developing countries.
BroadBand Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BBTK)") else Response.Write("(NASDAQ: BBTK)") end if %> gave its shares a boost of $6 5/16 to $34 3/4 by announcing a joint venture with Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTC)") else Response.Write("(NASDAQ: INTC)") end if %> to develop technology for consumers which offers high-speed access to the Internet. BroadBand's key product is the "Fiber Loop Access" (FLX) system, which allows telephone companies to provide high-speed communications via "local loops", and it expects this product to deliver the company's first profits. Fahnestock analyst Chandan Sarkar pointed out that this product will challenge cable modems, but warned that it needs to land a big contract first.
Edify Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EDFY)") else Response.Write("(NASDAQ: EDFY)") end if %>, which only debuted in its initial public offering (IPO) earlier this month, announced a major coup today, sending shares soaring $8 1/8 to $42 1/4. Edify has been selected by Visa to provide Edify Web banking services, including electronic bill payment, to Visa member banks around the world. Part of the deal includes Edify's support of Visa's e-pay system, enabling consumers to electronically view and pay bills through their banks.
QUICK TAKES: US ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %> split 2-for-1 today, leaving investors with twice as many shares, each worth half as much as before. Although splits shouldn't really mean much to investors, they are nevertheless often taken as bullish signs, and today was no exception, as shares of the modem-maker soared $6 3/4 to $95 3/4. . . ALCOHOL SENSORS INT'L <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASILU)") else Response.Write("(NASDAQ: ASILU)") end if %> was boosted $3/4 to $15 after announcing a $360 million contract to provide European countries with its "Sens-O-Lock" device, which determines when a driver is intoxicated and then prevents him from operating his vehicle. . . ISCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ISKO)") else Response.Write("(NASDAQ: ISKO)") end if %> surged $2 1/2 to $12 1/4 after a mention in Barron's this weekend. The company manufactures water pollution-monitoring instruments and laboratory equipment. . . CARDINAL BANCSHARES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CARD)") else Response.Write("(NASDAQ: CARD)") end if %> announced approval from shareholders to spin off its Security First Network Bank, sending shares up $9 1/4 to $81 3/4. . . Former Fool Portfolio holding BOSTON TECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BSTN)") else Response.Write("(NASDAQ: BSTN)") end if %> rose $1 7/8 to $18 5/8 after being upgraded from "neutral" to "accumulate" by Merrill Lynch. Merrill maintains a long-term "accumulate" rating on the developer of voice processing systems. . . Semiconductor concern APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMAT)") else Response.Write("(NASDAQ: AMAT)") end if %> is up $2 1/8 to $39 7/8 on the eve of its earnings announcement, when it is expected to report $0.99 per share, compared with $0.54 in the year-ago quarter. . . ACCLAIM ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AKLM)") else Response.Write("(NASDAQ: AKLM)") end if %> shares surged $1 1/4 to $11 5/8 after a licensing agreement was reached with 3DO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: THDO)") else Response.Write("(NASDAQ: THDO)") end if %> for new CD-ROM games.
System Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SSAX)") else Response.Write("(NASDAQ: SSAX)") end if %> gave the Street a shock today, and fell $4 1/2 to $19 5/8. The company warned that after having earned $0.10 per share in the year-ago quarter, it only expects to break even this quarter, and won't meet estimates of $0.14. System develops software for business applications, maintenance management, computer-aided systems engineering (CASE), and electronic-data-interchange (EDI) and blamed its current woes on a decline in professional services revenues and increased service expenses. Analysts are preparing to cut estimates.
It's a new week, so there must be another telecommunications merger, right? Right. Northern Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %> announced today that they had agreed to acquire MICOM Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MICM)") else Response.Write("(NASDAQ: MICM)") end if %> for $137.4 million in cash, or $12 per share. This wasn't exactly terrific news for shareholders, since the stock closed at $14 on Friday, it fell $2 1/4 to $11 3/4 today. Northern Telecom President and Chief Executive Officer (CEO) Jean C. Monty explained that "MICOM's product portfolio, technologies and distribution channels complement our rapidly expanding multimedia networks business which encompasses legacy data, frame relay and ATM products and services for enterprises and service providers."
Health maintenance organization (HMO) Healthsource <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HS)") else Response.Write("(NYSE: HS)") end if %> reported disappointing earnings today, posting $0.22 per share, when 21 analysts had mean expectations of $0.25. The company blamed higher-than-expected pricing pressures for premiums and would not comment on whether it expected these pressures to continue. This uncertainty helped drive shares down $7 3/4 to $24 1/8.
QUICK CUTS: ELCO INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ELCO)") else Response.Write("(NASDAQ: ELCO)") end if %> performed twice as well as analysts expected, posting earnings of $0.04 for the quarter. But like Oliver Twist, shareholders were apparently asking for more, as shares of the company which develops computer sales software fell $7/8 to $13 1/8. . . Consumer electronics accessory manufacturer RECOTON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RCOT)") else Response.Write("(NASDAQ: RCOT)") end if %> got whacked for $1 to $18 when it reported earnings of $0.14 EPS compared to $0.19 EPS a year ago, blaming higher research and marketing expenses for the disappointing decrease in net profit. . . It appears that MF Boring may have scooped Barron's on carbon-fiber giant ZOLTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZOLT)") else Response.Write("(NASDAQ: ZOLT)") end if %>. An analysis by Boring ran in Fool's Gold over the weekend, before anyone could have read the negative Ableson column in Barron's. The stock ended the day down $5 1/2 to $76 1/2. . . .Why did client/server software company OPEN ENVIRONMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OPEN)") else Response.Write("(NASDAQ: OPEN)") end if %> rise from $5 1/2 to $7 1/4 on Friday? Could someone have known about its acquisition by Borland <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BORL)") else Response.Write("(NASDAQ: BORL)") end if %>, which was announced today? Open shares fell $19/32 to $7 17/32.
FOOL ON THE HILL:
A Value In ValuJet?
The crash of ValuJet Flight 592 did not leave the company's stock unscathed today -- ValuJet tumbled $4 3/16 to $13 11/16 in fairly heavy trading after pushing as low as $11 3/4 during the day. Anticipating disastrous after-effects from the loss of the DC-9 in the Florida Everglades, Gruntal & Co. and Alex. Brown both downgraded the stock to "neutral" while S&P and Moody's began to re-evaluate ValuJet's debt. The specter of intensified Federal Aviation Administration (FAA) scrutiny as well as opportunistic competition taking advantage of ValuJet's sudden weakness weighed heavily on the shares today.
ValuJet is a rogue in the airline industry for a number of reasons. First and foremost, they compete almost completely on price. People do not buy tickets for a ValuJet flight with the expectation that they will get posh accommodations. In fact, they might not even buy with the expectation that they will arrive at their destination on time. ValuJet is also different because the company is wildly profitable with positive working capital and more cash on hand than debt. Measured by those standards, it is tough to find a better carrier than ValuJet.
Now, many are judging ValuJet on another criterion -- safety. The media has focused on ValuJet's fleet of aging DC-9s, maintenance issues that caused a week-long FAA investigation in February and a plane that had been forced to abort takeoff or make emergency landings seven times in the past two years for everything from leaving a door ajar to leaking fuel. With flight 592's pilot complaining of black smoke in the cockpit, all of these elements suddenly come to the forefront of any discussion of the low-cost carrier.
Let's be frank. What the analysts are worried about is passenger attrition due to the perception that ValuJet is not safe. Put another way, how much has ValuJet's brand been tarnished? Air Florida was a relative spring chicken when the disastrous crash of one of its 747s into the 14th Street Bridge killed 78 passengers and left the company bankrupt a few years later. More than a few are wondering -- could a devastating crash like this have the same effect on ValuJet?
Airlines are insured for a reason -- to stave off bankruptcy in case they have a crash. As for Air Florida's bankruptcy, the company ran itself in the same debt-heavy, cash flow-negative way that airlines have used since the dawn of aviation. When passengers dried up, the company was left teetering on the brink of financial doom. ValuJet, in contrast, could actually weather a downturn.
Despite the fact that their load factor (a measure of how full an airline's planes are) was down to 59% in the four months ended April compared to 66.6% the year before, the company's break-even point is 48.5% -- meaning that passenger traffic would have to decrease by 18.5% from current levels in order for the company to break even. You can probably do this survey yourself -- find some people you know who are scheduled to fly ValuJet and ask them if they are going to switch. If it is more than 1 in 5, avoid the stock. A simple as this sounds, it is probably more sophisticated than the logic that the downgrades were based on today.
The simple fact is that even if earnings growth slowed to 10% per annum the stock would just barely be fairly valued. If it clicks down to 15% from 20%, the stock is a bargain trading at 11 times trailing earnings. The price/sales ratio of 1.80 is not perfect, but it does not scream out a warning either. Based on assumptions of 15% growth, the company has a PEG of around 0.75 and a YPEG of 0.61. Anything less than 1.0 signifies an undervalued stock.
My only personal reservation with ValuJet has to do with the service -- it basically sucks. Every single time I have been involved with a ValuJet flight, it has been delayed and the person flying got a free ticket out of the experience. Anecdotal stories support the general impression that maintenance is not all it is cracked up to be. That said, anecdotal evidence from other carriers suggests they are not necessarily so far ahead of ValuJet either. The older planes themselves are not a danger if they have been well-maintained. Most of the smaller planes in the air make the DC-9s ValuJet is flying look like babies in comparison. If you have a pretty strong stomach and a time horizon of a year or more, ValuJet might make an interesting buy down here at around $14.
Do you have what it takes to be a Fool? Is your investing outlook sufficiently Foolish?
Well. . . take The Fool Quiz! The Fool Quiz is a new primer by Jeff Robinson (MF Swagman) and is chock full of entertaining questions and situations where you have to make an investment decision. And no, you don't have to order the teacher's guide separately! The detailed answers are included. Learn all about investing from the stories of Wenceslas Widgets and Mercutio's Church Doors. Make sure you know when to buy, when to short, and when to sell. Find out what CANSLIM and the PEG and the PPP really are. A masterful Foolish overview, and as interactive as printed paper can get! The Fool Quiz is available for $12 (plus $2.50 s&h) in FoolMart or by e-mailing [email protected].